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Here’s what I think the AstraZeneca vaccine means for the dividend

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It’s been two momentous months as far as Covid-19 vaccines go. 

In late November, AstraZeneca (LSE:AZN) released interim data on its Covid-19 vaccine candidate, which showed around 70% average efficacy. Excitingly, one of the company’s dosing regimens could be up to 90% effective. However, more data is needed to confirm these findings. 

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In December, both the US and the UK approved Pfizer/BioNTech’s vaccine that’s around 95% effective. 

Given that the Covid-19 vaccine market will be huge, here’s what I think AstraZeneca’s vaccine candidate means for the dividend. 

Short-term financial impact 

The financial impact of AstraZeneca’s vaccine candidate for Covid-19 in the short term is uncertain in my view. First AZN’s vaccine candidate hasn’t been approved yet.

Second, AstraZeneca has said it doesn’t intend to profit from its Covid-19 vaccine, currently named AZD1222, “during the pandemic“. Management defines this as ending at the start of July 2021. Although management could always extend the pandemic period in their definition, there’s a possibility they won’t. 

When the ‘pandemic period’ ends, it’s not clear how well the vaccine could do in the developed world. There could be a lot of competition. Given the wide difference between the average efficacy of AZD1222 and the higher efficacy of one dosing batch, there’s still a lot of uncertainty. If AZD1222’s efficacy isn’t as great, demand might not be as strong. If that’s the case, I don’t believe AZN will make a lot of money from the vaccine in the developed world. 

Given that I don’t think the vaccine will meaningfully affect AZN’s earnings in the short term, I don’t think it will affect the company’s dividend much either. 

Where I think the dividend might go

As for where I think the dividend will go in the next year or two, I think management will probably continue paying the same annual dividend. I think this because AZN management has paid the same annual dividend of $2.8 per share from 2015 to 2019. 

I think management might also have to save some money for the cash component of the recent Alexion deal. 

If the deal goes through, AZN has agreed to pay around $39bn for the company, with Alexion shareholders getting $60 in cash per share in addition to some AZN stock. Due to the deal, strengthening the balance sheet could be a bigger priority than increasing the dividend in my view. 

Before the deal, management expected FY 2020 core earnings to increase by a decent amount in constant currency terms.

Is the stock a buy?

Although it might not matter much in the short term, I think the vaccine, if approved, could help AZN considerably in the long term by increasing goodwill in developing markets. With more goodwill, I reckon there is potential for higher earnings from developing markets and more dividends in the long term. 

Given the potential for quantum computers and AI to unlock many advances, I am bullish on big pharma in general in the long run. Although the stock fell on the news, I also think AZN’s recent deal with Alexion could pay off in the long run given tech advances. Given that AstraZeneca is a leading big pharma company, I’d buy and hold the stock. 

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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